05.02.2004

Bank of England raises rates to 4 per cent

As widely forecast, the Bank of England's Monetary Policy Committee today voted to raise the Bank's repo rate by 0.25 percentage point.

The commentary stated that the world economic recovery has become more broadly-based. In the UK, output growth in the second half of last year was above trend and business surveys point to a further pickup in the first quarter. Household spending and borrowing have been resilient, and the housing market remains strong.

Although sterling has appreciated, continued growth above trend means that inflationary pressures are likely to pick up gradually over the next couple of years. Against that background, and despite CPI inflation currently below the 2 per cent target, the Committee judged that an increase of 0.25 percentage points in the repo rate to 4.0 per cent was necessary to keep CPI inflation on track to meet the new target in the medium term.

The increase in spite of indicators suggesting that such an increase was not necessary, is seen as a phsycological message to UK consumers to curb spending, Industrial output and export trends are seen as robust enough now to allow a softening of consumer led growth without damaging the overall economy.

Mortgage lenders moved quickly after the news to raise rates inline with the increase.